Banking Sector: Gaining More Interest

Driven by revival of capital expansion in the economy, the banking sector has been posting good growth in its overall performance and this trend is likely to continue at the same speed. In this article, Shreya Chaware highlights how this trend is fanned by the sector’s transition towards a digital ecosystem and hyper-personalisation 

October 2022 proved to be a cheerful month for the equity markets with the mood being enlightened by the festivities and also on account of the benchmark indices recording more than 7 per cent gain owing to foreign institutional investors (FIIs) returning to the Indian markets. Interestingly, private and public bank stocks were in the limelight during this month. Lenders i.e. banks and non-banking financial companies (NBFCs) are working on a happy note as the economy is now witnessing an increase in demand of credit on the one side while the NPA cycle is seen to be peaking out. 

Reserve Bank of India’s data shows that credit growth has inched above 16 per cent and is led by growth across the segment, be it industry, retail or SME. This broad base of growth has been seen after a long period of time and is driven by capital expansion revival in the economy, growth in the manufacturing sector and general demand revival, indicating higher inventory funding. Among some individual bank stocks which are buzzing in the current scenario, the HDFC twins are seen rallying after IIFL Alternative Research said that the merger of HDFC and HDFC Bank increases the probability of HDFC Bank’s inclusion in the MSCI India index. 

This is due to the changes in the merger and acquisition rules for the MSCI index. According to reports, MSCI no longer requires a minimum foreign room. On the other hand, continuous slide in foreign portfolio investor (FPI) shareholding in Kotak Mahindra Bank has cleared the way for the stock’s entry into the Financial Times Stock Exchange (FTSE) All-World index. There are chances that the stock may get added to the FTSE index during the semi-annual index review (SAIR) in March. To compare the performance of the Nifty Bank index and Sensex, in Q3FY23, so far, the Nifty Bank index has gained 9 per cent whereas it was around 18 per cent in FY23. Attracting attention has been the Nifty PSU Bank index, which jumped around 50 per cent during this period.

The above table highlighting the difference between returns of Bank Nifty and Nifty 50 clearly shows the outperformance of Nifty Bank index on a one-month, three-month, and sixmonth, year-to-date (YTD) and one-year basis. The benchmark indices, Sensex and Nifty 50, are nearly 2 per cent lower than their respective all-time highs. Outperforming the benchmark indices in the past month, Bank Nifty has zoomed beyond 9 per cent as compared to a 7 per cent rise in Sensex. Recently, Nifty Bank hit an all-time high for the second time in fiscal 2022-23. The following tables summarise the performance of stocks in Nifty Bank and Nifty PSU Bank indices for Q2FY23, so far.

Investor sentiment on bank stocks went up several notches as the private and public sector banks recorded healthy figures in earning numbers in Q2FY23. A majority of the banks in their management calls were seen guiding for high loan growth, led mainly by retail and SME segments. Also, the corporate segment showed an early indication of growth. Banks displayed double-digit growth of PAT by 41.6 per cent in Q2FY23 against 35.3 per cent in Q2FY22, underpinned by higher interest income in the rising rate cycle. Here’s throwing light upon the Quarterly Results declared by some of the top companies in the banking sector: 

 ◼ HDFC Bank, India’s largest private sector bank, reported 22.3 per cent growth in its net profit for Q2FY23 to ₹ 11,125 crore, with improved net interest income and margin on a YoY basis. The bank’s net interest income (NII) for the quarter zoomed 18.9 per cent on a YoY basis to ₹ 21,021 crore owing to a 23 per cent jump in advances, while the net interest margin (NIM) was stable at 4.1 per cent.

 ◼ ICICI Bank, India’s second-largest private sector bank, reported a net profit of ₹ 7,558 crore in Q2FY23, showing a growth of 37 per cent from ₹ 5,511 crore in Q2FY22. NII improved 26 per cent to ₹ 14,787 crore in Q2FY23 compared to ₹ 11,690 crore in the same quarter last year, aided by 23 per cent growth in loans and expansion in the net interest margin (NIM) to 4.31 per cent. The asset quality of the bank improved during the quarter while both advances and deposits witnessed healthy doubledigit growth.

 ◼ Axis Bank reported a consolidated net profit of ₹ 5,330 crore for Q2FY23, which grew by a stellar 70 per cent as against ₹ 3,133 crore on a YoY basis led by lower provisions. The NII zoomed 31 per cent to ₹ 10,360 crore from ₹ 7,901 crore in last year’s quarter. NIM for the quarter under review stood at 3.96 per cent.

 ◼ Kotak Mahindra Bank and IndusInd Bank also reported robust earnings for the September quarter, with both profit and NII growing in double-digits, along with improving asset quality.

 ◼ A group of public sector banks (PSBs) recorded higher operating profits in Q2FY23 as the treasury losses were more than offset by fee income. Most of the PSBs had posted loss at an operating level in Q2FY22 due to loss on investments. Recently, Union Finance Minister Nirmala Sitharaman asserted that the 12 PSBs reported 50 per cent jump in combined net profit to ₹ 25,685 crore in Q2FY23.

In the equity markets, majority of the top banking companies according to market capitalisation have recorded a positive performance since October 1, 2022 on a six-month and YTD basis, as indicated in the table alongside: 

Probable Key Trends in Banking Sector

After looking at the operational and financial part of the banks, let us focus on some key trends which are expected to be adopted by the banking and financial companies going forward. The four major trends in this sector which is now seeking to adjust to a significantly more digital ecosystem can be identified as follows: 

1. Digital Payments: The area that keeps on changing rapidly is the way people pay. Even if cash is still used for a majority of transactions, advanced use of cashless and contactless payments is being adopted by all segments of consumers across all industries.

2. Collaboration with Financial Technology Companies: Some traditional banking organisations still consider financial technology (fintech) companies as a huge competitive threat due to their digital technology, agility and ability to transform data into highly personalised engagements. However, such companies can be seen as a gateway to innovation. Partnering with these firms has led to many innovation initiatives at banks and credit unions of all sizes.

3. Aiming for Hyper-Personalisation: Consumers are seen being increasingly inclined towards highly personalised digital interactions across all kinds of industries. This helps banks in creating a highly relevant level of service, which in turn helps in enhancing loyalty by recognising past interactions and predicting future needs. The increase in sales and engagements through such interactions helps to grow revenue.

4. Data and AI Opportunities: Most banks and credit unions already are using some form of data analysis to optimise performance or tap new markets. The challenge is that most efforts are in their infancy due to infrastructure, data and talent shortcomings. 

Investor sentiment on bank stocks went up several notches as the private and public sector banks recorded healthy figures in earning numbers in Q2FY23. A majority of the banks in their management calls were seen guiding for high loan growth, led mainly by retail and SME segments. 

Outlook

On the global economic front also, the banking industry remains a bit cautious before entering 2023. The uncertainties continue with the confluence of factors such as Russia’s invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation and tightening monetary policy across the world. The large, well-capitalised and diversified banks are expected to stand firm by this storm. India Ratings has also raised its credit growth expectation in FY 2023 to 13 per cent from 10 per cent earlier. The report said that there are multiple factors driving the upward revision. 

The increase in working capital demand in the face of capital expansion is likely to see some moderation, given the build-up of macro uncertainties. There is a shift from capital markets to banking system for longer term funding due to adverse interest rate cycle and there is better than expected revival in credit demand. In the near term, smaller banks are likely to see a shift in the interest segment as retail investors are becoming more attractive and the as the larger banks bear high CASA deposits, they are much better placed in a tightening liquidity and higher interest rate scenario. 

The optimistic aspects and expected business growth is yet to be factored in the valuation of the banking and financial (BFSI) sector. It may appear that the sector is currently trading at lower valuations as compared to the previous years. If the sector is able to deliver earnings’ growth higher than the nominal GDP growth as predicted and in turn create opportunity for longterm wealth creation for investors, banking stocks would definitely be considered as holding strong potential for investment. In the meantime, as mentioned earlier, the transition towards a digital ecosystem certainly bodes well for future prospects.

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